2023-10-09 01:30:32
Criticism of a report in a magazineNational Interest“The US Reserve Bank’s policy of clinging to high interest rates, warning that this may lead to great difficulties for the US economy.
The magazine said in its report: Economic realities are rapidly changing for the worse, so the Fed would do well to quickly back away from its current mantra that interest rates need to remain high for longer to reduce inflation. If, despite these new realities, the Fed continues its hawkish stance on monetary policy, we should prepare for a sharp economic downturn.
The magazine explained that among the most disturbing new facts: The sudden loss of investor appetite – both at home and abroad – for long-term US Treasuries, and investors are increasingly concerned that the budget deficit is heading towards 8 percent of GDP, at a time when the country is approaching full employment.
The magazine added that investors are concerned that given the political dysfunction in Washington, there is little possibility that this budget deficit will be reduced any time soon.
The question investors are asking is: Who will finance the government’s long-term borrowing needs and at what price? This question becomes more poignant over time; The Federal Reserve Bank continues to reduce its balance by $95 billion per month, by not renewing maturing Treasury bonds and mortgage-backed securities.
It also becomes influential at a time; We know that both China and Japan are working to reduce the size of their holdings of Treasury bonds.
The magazine indicated that the net result of this change in investor sentiment is that, in a short period of two months, the yield on very important Treasury bonds, on the basis of which many other interest rates are measured at home and abroad, rose from less than 4 percent to 4 percent. percent, reaching regarding 4.75 percent, or their highest rate in sixteen years.
This rise has already pushed thirty-year mortgage interest rates to nearly 8 percent, making housing unaffordable for the average American family.
It remains to be seen whether the US housing and auto markets can withstand these higher interest rates.
The magazine stated that another major change that the Fed should pay attention to is the cracks that are now appearing in the banking system. At the beginning of the year; We witnessed the second and third largest bank failures in US history; When Silicon Valley Bank and First Republic Bank went bankrupt. The failure of these two banks was primarily due to the damage caused by high interest rates to their long-term bond and credit portfolios. With long-term interest rates now at higher levels, the banking system is bound to take another heavy hit to its balance sheet; As a result of falling bond prices.
The magazine confirmed that it has now become clear that we will see a wave of commercial real estate loan failures next year, and this is the time when real estate developers will have to renew more than $500 billion in loans at significantly higher interest rates, at the same time they suffer from… Of extraordinarily high vacancy rates in the post-Covid world. This might be a major blow to regional banks, whose commercial real estate lending exposure is approaching 20 per cent.
The magazine pointed out that when Alan Greenspan was head of the Federal Reserve, he noted that any country might not be considered an island in itself in light of the global economy, which is characterized by a high degree of integration today. For this reason, the Fed must pay attention to the rapid deterioration in the global economic outlook; China, now the second largest economy in the world, is experiencing the slowest economic growth in decades. In the wake of the bursting of the massive housing and credit market bubble.
On the other hand, Germany has already experienced three consecutive quarters of negative economic growth, while struggling once morest the combined impact of the energy shock caused by Russia and the slowdown of the Chinese economy. With the European Central Bank raising interest rates at a time of economic weakness, it is only a matter of time before the rest of the European economy succumbs to recession.
The magazine concluded the report by emphasizing that when determining interest rate policy, the Federal Reserve must look to the future and take into account the major negative shocks at home and abroad that the American economy will have to grapple with. The magazine also stresses that it is unfortunate that the Reserve Bank The Fed, in clinging to its reactionary, data-driven policy, shows no sign of changing policy course anytime soon. In doing so, the Fed risks exposing us to an economic downturn that is harder than necessary to contain inflation.
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